How confused have you been over the new tax law? While it was making its way through Congress it seemed like we heard different stories everyday of what awful or wonderful things would befall us once it was passed. Then, by the time it was signed into law by President Trump on December 22nd, we were all knee deep in Christmas preparations and didn’t have time (or much desire) to study tax law.
Well, anyhow, the holidays are over and I’ve been reading up on the bill. I thought I would offer you a list of what changes the tax reform makes for home owners and mortgage borrowers. Let me preface this article by saying that I’m not a tax expert, financial advisor, or very good at reading tax law, but below are what I see as some of the greatest impacts of the new law on home owners and mortgage borrowers. I strongly recommend that you speak to a tax professional regarding your specific situation:
The limit on mortgage interest deduction has been lowered to $750,000 (from $1 million)
So, if the principle balance on your mortgage is $750,000 (previously $1 mill) or above and you purchased your home after December 15, 2017 you will no longer be able to deduct mortgage interest above the $750k mark. If you bought your home prior to December 15th you are grandfathered in and the deductibility of your mortgage interest remains the same. CNBC reports that 94 percent of homeowners will not be affected by this change and will continue to be able to deduct interest as they always have. Even in high tax areas like California and New York, the large majority of homeowners – about 70-80 percent – will not be affected.
Mortgage interest deduction is available on your primary residence only
If you have a mortgage on a vacation or second home, you will no longer be able to deduct the interest. However, if your second home is used for income purposes and you rent it out, you will still be able to write off the costs associated with renting it out, which included a portion of the mortgage interest and property taxes.
Deducting Property taxes (as well as state and local income taxes)
Speaking of property taxes, under the new law, you will be able to deduct up to $10,000 of your property, state, and local taxes from your federal taxes. According to the National Association of Realtors, 95% of taxpayers pay less than $10,000 so will continue to be able to deduct all those taxes paid.
Capital Gains on home sales still excluded
The law regarding excluding capital gains on the sale of your primary residence remains the same. You can exclude gains of up to $500,000 for a married couple filing jointly or $250,000 for a single filer.
Tax deferred 1031 exchanges remain unchanged
Good news for investors and those in commercial real estate, NAR reports that 1031 exchanges remain the same for the sale and subsequent purchase of another commercial or investment property.
So, how will these changes affect the housing market? Obviously, no one knows for sure but between the NAR and economists, here’s what I’m seeing as the leading theories:
Housing prices will not go up as fast
Analysts at Moody’s Analytics believe that over the next 18-24 months the new tax law could be on drag on home price appreciation to the tune of an average of 4 percent, total (which could offer greater opportunities for home buyers). Moody’s published the map below to show the effects on each county across the U.S.
Could mortgage rates improve?
Analysts at the Washington Post reported that they believe that the cut in corporate tax creates an opportunity for Fannie Mae and Freddie Mac, the main funding sources for banks, to lower mortgage rates for borrowers because their tax burden will be lower and thus they can pass those savings on to mortgage borrowers in lower fees and interest charges.
For the large majority of Americans, we’ll be paying less in income taxes, plus the standard deduction is doubled to $24,000, which means less work at tax time for many of us that would otherwise have to collect all of our documentation to itemize. Lower tax bills means we have more money to spend on other things, like our homes. So yes, there will be some effects on the housing market, but even before this reform law the housing market has been strong and improving steadily. I’ll continue to keep an eye on housing and keep you in the loop how it effects the housing market and report back.
P.S. If you are considering purchasing a home or investment property this year, I’d be happy to walk through options with you. If you appreciate personalized, white glove mortgage advice and service, located locally in Southern California, reach out.
If you’d like to consult the resources I used in this article, they’re listed below:
View the actual tax bill HERE
CNBC article and story HERE
Washington Post story HERE
National Association of Realtors HERE